LOGISTICS OF EXPORTING TO EURASIA SERIES

UKRAINE REPORT

May 31, 2007

Author: Sergiy Polovenko, BISNIS representative in Kyiv, Ukraine

The report summarizes commercial, political and business development news in Ukraine for May 2007. The information is received from the Ukrainian news agencies (UNIAN, Ukranews, Interfax-Ukraine, Ukrinform, Ekonomicheskie Izvestiya), regional periodicals (Kyivpost, Korrespondent, Kyiv Weelky), PR departments, and web-cites of the regional governments and local companies.

Some of the figures listed in the text are in local currency – Hryvna (UAH). Current exchange rate is 1 USD = 5.05 UAH.

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Ukraine Economics:

January-April, 2007 saw growth of GDP by 7.9% year-over-year. April 2007 saw boost of GDP by 7.7% year-over-year. The GDP mainly prevailed in the sectors of construction at 13.1%, processing industry as 14.2% and commerce at 14.9%. The Cabinet of Ministers predicts growth of GDP in 2007 at 6.5%. According to a draft forecast of economic and social development of Ukraine in 2008, the real gross domestic product in 2008 will grow by 7.2%, industrial production by 9%, real salaries by 14.3% and imports by 15.4.

In January - March 2007 export of goods amounted to 10.726 billion USD and import of goods constituted 12.952 billion USD. Comparing to January-March 2006 exports grew by 33% and imports by 32.2%. The biggest export supplies in the first quarter of 2007 were made to Russia (25.3% of the general export amount), Turkey (7.8%), Italy (6.8%), Germany (3.6%), Poland (3.5%), Belarus (2.9%) and Hungary (2.5%). The biggest import deliveries came from Russia (29.4%), Germany (8.5%), China (4.9%), Poland (4.5%), Italy (2.6%), the Republic of Korea and Belarus (2.3% each).

In January-April 2007, Ukraine reduced electricity consumption based on the process losses by 2.4% (by 1 billion and 588,2 million kilowatt/hour) versus the same period of 2006.

The industry increased the electricity consumption since early 2007 by 3.5% - up to 27 billion and 438.6 million kilowatt/hour, whereas population reduced the electricity consumption by 4.1% - up to 10 billion and 70,1 million kilowatt/hour. The industry's total electricity consumption volume in Ukraine grew from 52.8% in January-April 2006 up to 54.3 in January-April 2007, whereas the population's total electricity consumption volume decreased from 20.9% up to 19.9%.

The State Railway Transport "UkrZaliznytsya" following the results of the first quarter 2007 increased transit freight by 31% - up to 17 million tons. year-on-year. 80% of the freight flow belongs to the Russian goods. The transit fraction in the railway transport freight equal to 15%. The "UkrZaliznytsya" is a state-owned agency dealing with the railway transport operation in Ukraine. The agency includes 6 railways that connect all Ukrainian regions, 1, 684 stations and 126 basic railway stations of the state. It is capable of transporting 300 million tons of cargo and 500 million of passengers annually.

Ukraine and the WTO have agreed upon the state support for agriculture during the transition period, sources with the Ukrainian Agrarian Confederation say. According to the agreements, which were reached at informal talks in Geneva, as the basis for calculations of budgetary donations to agriculture the period between 2004 and 2006 will be regarded. Thus, state support for agriculture will reach 1.7 billion. USD annually.

Automotive:

In 2007, Ukraine's motorcar building market will see French and Chinese companies that are to build their plants in Ukriane. Citroen plans to invest 100 million USD in construction of a motorcar factory in the Brovary district of the Kyiv region. The motorcar plant will include the motorcar assembly factory, the logistics center, the auto-saloon, and the service station.

The Chinese Chery plant is also expected to appear in Brovary. The plant's construction is planned for 2007.

Banking:

The "Greek Piraeus Bank" has signed a deal on purchase of 78% of the Ukrainian "International Commerce Bank". The "Piraeus Bank" is a leading Greek bank operating 301 departments in Greece and one in London. The bank also has offices abroad, notably in Bulgaria, Albania, USA, Serbia and Egypt. The bank's assets are evaluated at 43.5 billion Euros. This purchase has constituted the next case of foreign banks penetration into Ukrainian banking market following the purchases of 94% shares of Ukrainian "Azhio" bank by the international Finance Group "SEB" in October 2004, 93.5% of "Aval" bank shares by the Austrian "Raiffeisen International Bank-Holding" in August 2005, acquisition of 85.42% of the "UkrSotsBank" by the Italian "Banca Intensa" in February 2007 and 51% of the "UkrSibBank" by French "BNP Paribas" in April 2007.

Energy:

The European Bank for Reconstruction and Development presented a Ukrainian Energy Efficiency Programme (UKEEP). The program is financed by the Swedish Government and costs 100 million EUR. The program is aimed at granting sub-credits to the tune of up to five million USD to Ukrainian companies for introduction of energy efficient technologies.

The main Ukrainian bank, program participant is UkrExImBank (50 million EUR), another bank participant is KreditPromBank (10 million EUR).

The Shebelynskyi Gas-Processing Plant (Kharkiv region, East Ukraine) started preparing for investment project implementation with estimated value of 104 million USD. Within the project, the light gasoline cuts isomerization unit should be constructed and should be put into operation by 2010. By introducing the isomerization unit the plant will increase gasoline production of the Euro-3 and Euro-4 standards. Quality level can be brought to the Euro-6 in case Ukraine will show a relevant demand on gasoline of the kind. The unit's industrial construction is to begin in 2008.

A draft concept of development of hydrocarbon extraction in the Ukrainian shelf of the Black Sea and the Sea of Azov for 2007 - 2015 envisages opening 13 new wells. In 2015 the volume of gas extraction from the sea shelf is expected to reach 6.5 billion. cu. m. per year, gas condensate 700,000 tons and oil 3.56 million tons. Presently, the Ukrainian shelf is being explored by the state-run joint-stock company "ChornomorNaftoGaz". The company runs 7 wells, including 4 wells on the shelf (three in the Black Sea and one in the Sea of Azov) and three wells overland. In 2006 "ChornomorNaftoGaz increased gas extraction by 1.8% up to 1.3 billion cu. m.

Alternative Energy:

As much as 6 million EUR will be invested by the Italian company Kogen-P into the project of growing rape for production of bio fuel in the Sumy region. The Italian company means to rent 6,000 ha of land in the Putivlsky district of the region to grow rape there since the upcoming autumn. Bio fuel will be used at power stations, one of which is being already constructed in Italy especially for the Ukrainian fuel.

In June 2007 the first synthetic gas production unit to be put into industrial operation.

The unit is designed for wood wastes usage and able to produce gas of the same quality as the natural. The unit's capacity is up to 6 thousand cubic meters of gas a day. The State Committee of Ukraine for Standardization, Metrology and Certification approved technical conditions for the mixed gas production, in case if the proportion of the 15% of synthetic to 85% of the natural gas is met. The mixed gas use will partially interchange the natural gas usage, and decreasing its consumption simultaneously. Experts think that Ukraine is capable of using of up to 10-12 billion cubic meters of the synthetic gas as the natural gas. This gas can be used for industrial and consumer needs.

Food sector:

One of Russia's biggest producers of children's nutrition, the company Nutritek is entering Ukraine's market. It has already been announced about starting supplies of the main brand and by mid 2008 the nutrition will be produced in Ukraine. The company was established in 1990, produces juvenile nutrition at 12 enterprises in Russia and in Estonia. In early 2006 the company Nutritek purchased over 56% of the Khorolsky factory of children's nutrition in Poltava region by 9 million USD.

Infrastructure:

The World Bank will give Ukraine a credit of 144 million USD for water supply improvement. The long-term credit with 3-year delay in payment by interest will be given this half year. 70 million USD will be distributed among Donetsk, Odessa, Lviv and Ivano-Frankivsk, and 74 million USD more will be given to small cities to be chosen by the World Bank.

The European Bank for Reconstruction and Development has earmarked 175 million Euros to rehabilitate the M06 Kyiv-Chop road. The M-06 "Kyiv-Chop" is prolongation of international transport corridors No 3 and No 5.

The Ukrainian Government has agreed with the International Bank for Reconstruction and Development on additional financing of the project "Rehabilitation and Enhancement of Central Heat Power Supply of Kyiv", which is about receiving additional financing to the tune of 40 million USD. The total sum to the project now amounts to 160 million USD. The project is aimed at providing the Ukrainian population with more quality public utility services and improving the reliability of functioning of the heat power supply system and energy efficiency.

With a view of stabilizing the situation in the municipal housing economy the World Bank will grant Ukrainian water-supply enterprises 150 million USD.

In 2007 the State Administration of Railroad Transport "Ukrzaliznytsia" means to invest 196 million USD into the renewal of the rolling stock. Ukrzaliznytsia is the railroad transportation monopolist in Ukraine, it unites six railroad departments.

Initiatives:

The United States of America plan to allocate 1.4 million USD for enhancing safety at Ukrainian mines in 2008. It was stated that common Ukrainian-American projects, which are directed at reducing industrial traumatism at coalmines of Ukraine, are efficient and extremely important for creating safe labour conditions for miners.

Japan has granted Ukraine a 2.5 million USD aid, due to a bipartite agreement on notes exchange between governments of Ukraine and Japan of March 15, 2006. The financial aid aims at development of market economy in Ukraine. The program is being fulfilled by the Ukrainian State Innovation Company.

Investment:

The investment company "Dragon Capital" has established the investment fund "Dragon Ukrainian Properties and Development" with the 208 M. USD emissions. The company will invest into projects of the trade, office, stock and hotel real estate in Kyiv and the Kyiv region and regional centres with the population of over 700,000 people. Shares of the company will be placed at the London Stock Exchange.

Heavy industry:

The "DniproPress" will perform rehabilitation of the Bharat Heavy Electricls Ltd, engaged in production of energy turbines and aggregates. In December the "DniproPress" will complete production of equipment, which is be handed over to the Indian party. The contract is evaluated at 2 million USD. The "DniproPress" is Ukraine's' only engineering company, engaged in elaboration and production of heavy and hydro-pressing equipment.

Kazakhstan officially confirmed plans to invest in ferroalloy plant building in Dniprodzerzhynsk (the Dnipropetrovsk region). The plant's estimated value is 0.5 billion USD and it is going to be built at the area of the former Prydniprovskyi chemical factory, 75% statutory fund to be owned by the Kazakh party. The Prydniprovskyi chemical factory was the USSR's first plant involved in uranium processing (1948-1991). As a result of the conversion there were 22 enterprises built in the former plant's area, and some of these plants operate within the short-cut nuclear fuel cycle program. Factories that produce zirconate-hafnium products (manufacturing of the metal zirconate, alloy and base metal, hafnium-based chemical compounds), ion-metathetical materials for sorbate extraction of uranium, gold, molybdenum, tungsten, gallium from pulps and mortars, as well as water purification for industrial needs are operating on the basis of the plant.

The Council General of the "Rockwool International" has decided to construct a plant to produce mineral cotton in Ukraine. The "Rockwool International" penetrated the Ukrainian market in 1997 and remains one of the biggest players on the construction insulation materials market of Ukraine.

Science and high-tech:

The First Ukrainian Forum "Science-Production" has opened in Kharkiv. It aims reaching direct cooperation between scientific organizations of China and the Kharkiv region.

The program includes presentation of new scientific-technical elaborations of educational institutions, enterprises in the sectors of IT, computer engineering and management, information protection and others.

The first Ukrainian communications satellite should be produced by 2011. The spacecraft will be employed for transmitting voice data, telecasting, and Internet servicing. Governmental agencies and private organizations are supposed to be the satellite's users.

The budgetary funding for preparatory works is going to start in 2007. The project's value is 200 million USD. It is planned that one third of the investment would be covered from the budget and the rest is to be sourced from private investors.

Stocks:

The Ukrainian stock exchange, First Securities Trading System (PFTS) signed an agreement with the Warsaw Stock Exchange (WSE) on introduction of double listing in the countries with the key idea of the agreement to be overcoming competition with international stock exchanges. The signed agreement envisages likelihood of presence of Ukrainian and Polish companies on the two countries' stock exchanges with a view of reciprocal investing, creating the common market, exchanging information, personnel and staff training. In November 2006 the WSE announced its intention to open its office in Kyiv in the first half of 2007.

The PFTS stock exchange covers 96.4% of the market in volumes of securities trade (27.63 bn. UAH). As many as 160 companies participate in the stock exchange with 737 issuers in the listing. The WSE listing contains 293 companies, including 13 foreign companies.

Transportation:

The Road Police and the Internal Ministry Road Police Department have informed about limitations for trucks with the weight of over 24 tons under conditions of weather temperature exceeding +28 C° (+82.4 F). The limitations will be imposed to prevent from destruction of roads in Ukraine.

BISNIS (www.bisnis.doc.gov) is part of the U.S. Commercial Service (www.export.gov).